Part II: Ethical Issue Analysis [40 marks] You are given the following scenario
ID: 361168 • Letter: P
Question
Part II: Ethical Issue Analysis [40 marks]
You are given the following scenario regarding an ethical issue on financial reporting. You are required to analyze the ethical issue and establish an approach to resolve the issue.
Scenario(written by Dr. Olivia Leung and Dr. Winnie Leung)
A Backroom Deal
Happy Burger is a famous fast food chain primarily selling burgers, french fries and chicken products. By September 1990 when Happy Burger made its initial public offering, it had expanded to 30 locations and operated its own facility for processing food in an effort to lower costs and maintain consistency. Today, Happy Burger is the top five largest fast food chain in Hong Kong and serves over 100,000 customers each day. In response to the market changes, the company is now planning to open a new subsidiary brand ‘Kiss Kids Cafe’ which will offer play areas and kid-friendly meals to attract middle-class families with young children.
A year ago, Happy Burger started collaborating with a new vendor ‘Wheemeat’ that supplies raw chicken and beef. Wheemeat is owned by the nephew of Ricky Ko, the Chief Executive Director of Happy Burger. In fact, Ricky Ko and his nephew are not only relatives, but also close partners in other businesses. Comparing with the previous meat vendor, Wheemeat’s products are unreasonably high-priced. Thomas Lui, the newly joined Chief Operating Officer of Happy Burger, noted that the Procurement Service Department of Happy Burger granted the supply contract to Wheemeat last year without going through the official tendering procedures. There is no record of supplier evaluation from the Tender Board as if the Department did not call for any tenders. Besides, only limited information was provided by Wheemeat for validating its operational and financial stabilities.
Thomas is recently handling a complaint from the Head of the Processing Plant, Keith Chan, regarding the poor quality of meat supplied by Wheemeat. Keith finds that the meat is not vacuum packed and has a stale smell. The storage and transport hygiene is also suboptimal. The meat is likely spoiled or expired. During the investigation, Ricky and the Head of Procurement are suspected of receiving commission from the Wheemeat’s contract. Thomas worries that the reputation of Happy burger will be seriously impaired if the poor meat quality and senior management’s misconduct are uncovered to the public.
Assume you are Thomas Lui, please answer the following questions.
(1) Identify and describe the ethical issue(s) in this case. [10 marks]
(2) List three possible options for resolving the above issue(s) and evaluate each of the options. [15 marks]
(3) With reference to the applicable standards (e.g. HKICPA code of ethics, Hong Kong Stock Exchange listing rules, etc.), suggest and explain an action plan that you should carry out based on your evaluation of the options under (2). [10 marks]
[Grammar and Organization: 5 marks]
Requirement (1):
Identify and describe the ethical issue(s) in this case. [10 marks]
Answer (maximum 300 words):
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Answer (maximum 300 words):
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Explanation / Answer
The Ethical issue in the case is the conflict of interest and Nepotism in finalizing the vendor deal.
Here the vendor was selected without any proper protocol being followed, the details of the process followed are missing, and the final approval has come from the Ricky Ko, the Chief Executive Director of Happy Burger who has a serious conflict of interest in deciding the deal. As the owner of the vendor, Wheemeat is a family relation and is Nephew of the Chief Executive Director there is direct conflict in taking the final call, and the decision making should have been transferred to someone else without any conflict of interest. And along with serious nepotism both the parties have several common interests as they are partners in several businesses which makes the situation even worse.
And it can also be observed that while evaluating the proposal for the vendor allocation, no other vendors were considered as there is no documentation and even for Wheemeat all the details which should have been checked are not present. The contract was given even when the prices of Wheetmeat is reasonably higher.
Unfortunately, there is no real reason to justify the selection of the current vendor, as there is no pros but only disadvantages. Hence, it clearly unethical for such a high position holder of the company to resort to nepotism and circumvent several conflicts of interests to award a vendor contract. And so the top brass took advantage of his position to do favour to his business partner.
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